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Jensen Quality Growth Discipline Has Avoided Energy and Utility Sector Inclusion

October 2020

... the Jensen Quality Growth Strategy is ranked in the low carbon risk category, with 36% less carbon risk and 64% less carbon intensity than the benchmark S&P 500 Index.

Profitability Screens and Competitive Advantage Assessment

In order to qualify for the Jensen Quality Universe™ a business model must produce ten consecutive years of high profitability, as measured by a return on equity of 15% or greater. Companies must also demonstrate durable competitive advantages, growth in operating cash flows, and the ability to reinvest those cash flows in a meaningful way to support margins and protect market share against competitors.

In most cases, highly cyclical business models (e.g., fossil fuel companies) or regulated industries (e.g., U.S. electric utilities) are unable to sustain the high profitability levels required by Jensen to endure a full economic cycle. Just two energy companies (Exxon Mobil and Ultra Petroleum) and one utility company (Exelon) have qualified in the past. Initial research and Investment Committee review on Exxon Mobil indicated that despite strong cash flow generation, the business model had few sustainable competitive advantages given the volatility of the underlying price for its end products (oil/natural gas).

Figure 1 highlights the historical progression of the Jensen Quality Universe at the sector level and illustrates the lack of energy and utility sector exposure.

Portfolio Observations

According to the Sustainalytics Carbon Risk Report (as of 9/30/20), in the appendix, the Jensen Quality Growth Strategy is ranked in the low carbon risk category, with 36% less carbon risk and 64% less carbon intensity than the benchmark S&P 500 index. Furthermore, the report affirms that the portfolio includes zero fossils fuels and zero stranded assets exposure.

Source: ISS, Company Sustainability Reports as of October 26, 2020

*CSR data: Scope 1 and Scope 2 (market based) emissions for Accenture, Mastercard, 3M, Nike, Pepsi, Pfizer, Procter & Gamble, and Texas Instruments were pulled directly from corporate sustainability reports that were released after the latest data set made available to Jensen from ISS.

The Sustainalytics Carbon Risk Rating quantifies a company’s exposure and management of material carbon issues in its own operations as well as its products and services. At each value chain stage, a company’s vulnerability to carbon risks is assessed. This is followed by an assessment of how much of this risk is manageable as opposed to systemic and concludes with a final step of evaluating the degree to which management policies are already in place.

Only four companies in the Jensen Quality Growth Strategy are identified as medium risk1 and they constitute 12.41% of the total portfolio at the end of the third quarter of 2020.

Why Does it Matter?

Jensen Quality Growth companies are leaders in environmental risk mitigation. Our portfolio companies play a prominent role in reducing or minimizing the amount of greenhouse gas (GHG) emissions caused by manufacturing and distribution and the amount of energy required to run their businesses.

For example, 10 portfolio companies2 that comprise 43.57% of the portfolio, are signatories to the Paris Agreement. Further, another 13 companies3 support the Climate Disclosure Project (CDP) and/ or science-based targets for scope 1 and scope 2 emissions that aim to keep global temperature increases either at or below 1.5° or below 2°C through 2030.

Carbon Risk Examples

United Parcel Service (UPS)

Although it has the highest carbon emissions profile and intensity score in the portfolio we believe that management is taking the necessary steps to minimize the growth of the company’s scope 1 emissions; it has invested $1 billion in alternative vehicles, fuels, and infrastructure over the past decade. Furthermore, out of its 125,000 vehicles more than 10,300 are considered alternative fuel and advanced technology vehicles with a goal of reducing absolute GHG emissions 12% in global ground operations by 2025 (2015 baseline).

Progress has been interrupted by headwinds due to e-commerce growth, which is driving a need for an increased level of residential package deliveries, as well as growth in the total number of shipments completed. UPS has invested in operating capacity across its network to accommodate this volume growth, including network planning tools and technologies, fleet expansion and facility automation which, despite requiring more energy, help improve efficiencies. The company reiterated its commitment during the first quarter by announcing a significant investment in the U.K.-based startup Arrival, which will expand the fleet to include an additional 10,000 all-electric vehicles. Management’s long-term plan is to replace substantially all ground vehicles with electrics.

UPS continues to report on GHG intensity levels, using the Transportation Intensity Index (TII)4. The company’s goal is to reduce its overall carbon intensity level by 20 percent by 2020 (2007 baseline). This Index captures the overall efficiency of the global network by measuring GHG emissions associated with transporting packages and freight to customers during a given calendar year. As of 2019, UPS has realized an overall carbon intensity level reduction of 19 percent (composite score from its U.S. small package operation, global airline fuel, and U.S. supply chain & freight operation).

Explore the Jensen Quality Strategies

Apple (AAPL)

Apple has reached carbon neutrality for corporate emissions (including business travel) resulting from the use of 100 percent renewable electricity for its facilities and investing in high-quality projects that protect and restore forests, wetlands, and grasslands. The company is committed to full carbon neutrality or end-to-end footprint by 2030, inclusive of its supply chain, shipping, and devices. A key component of the company’s roadmap is a new Impact Accelerator initiative to support minority-owned businesses making investments in renewable energy or carbon capture projects to help fight systemic barriers in our economy.

The company’s environmental strategy is informed by comprehensive data and input from external stakeholders. Achieving these goals requires focus and innovation in three key interconnected areas: climate change, resources, and smarter chemistry. Apple plans to further reduce emissions 75% by 2030 (2015 baseline) and then invest in carbon removal solutions for the remaining emissions. For example, by making products and packaging using only recycled or renewable materials, stewarding water resources and sending zero waste to landfill while maintaining rigorous controls to ensure their products are safe for anyone who assembles, uses, or recycles them. Management scores strongly under Sustainalytics’ level of involvement.


For U.S. Large Cap Investors who are looking for fossil fuel free and low carbon solutions, we believe that the Jensen Quality Growth Strategy can meet that need in addition to satisfying the fiduciary standards of care for active management.

In summary, the portfolio has zero fossil fuel exposure historically, it maintains a below-average carbon footprint, and demonstrates an even lower carbon intensity5 score versus the S&P 500 Index (as measured by Sustainalytics’ Carbon Risk Report).

1 Amphenol (0.66% portfolio weight), General Mills (3.65%), 3M (4.85%), and United Parcel Service (3.25%).

2 Alphabet (5.62% portfolio weight), Apple (4.61%), General Mills (3.65%), Johnson & Johnson (5.88%), Microsoft (6.91%), Nike (4.75%), PepsiCo (6.47%), Starbucks (2.31%) and VF Corp (2.37%), and Waste Management (1.00%) as of September 30, 2020.

3 3M (4.85%), Accenture (4.65%), Automatic Data Processing (2.14%), Beckon Dickinson (5.55%), Broadridge (2.24%), Intuit (3.17%), Mastercard (2.51%), Omnicom (0.47%), Pfizer (3.76%) Procter & Gamble (2.23%), Stryker (4.42%) Texas Instruments (2.01%), and TJX Companies (1.69%)

4 Introduced in 2010.

5 41.2 tCO2e/Mil USD vs 153.0 tCO2e/Mil USD

All factual information contained in this paper is derived from sources which Jensen believes are reliable, but Jensen cannot guarantee complete accuracy. Any charts, graphics, or formulas contained in this piece are only for the purpose of illustration and cannot by themselves be used to make investment decisions. The views of Jensen Investment Management expressed herein are not intended to be a forecast of future events, a guarantee of future results, nor investment advice. Holdings and sector weightings are subject to change without notice.

Past performance does not guarantee future results.

Because Jensen’s high ROE Quality Growth investment strategy involves the use of concentrated/ nondiversified portfolios (normally approximately 25–30 holdings), accounts managed by Jensen (including the Jensen Quality Growth Fund (the “Fund”)) invest in only a small number of securities that qualify for Jensen’s “investable universe” each year (i.e., the group of companies (currently fewer than 250) that have earned a ROE of 15% of greater for the last 10 consecutive years, as determined by Jensen’s Investment Committee). In addition, a number of the securities that qualify each year exhibit valuations and other characteristics that Jensen considers to be more indicative of value rather than growth stocks, and as a result such securities are normally excluded from investment consideration for the accounts of the firm’s high ROE Quality Growth clients. Therefore, the portfolio of securities included in the high ROE universe are not representative of the current or past securities portfolios for any current or former investment advisory client of Jensen, including the Fund.

Mutual fund investing involves risk; loss of principal is possible. The high ROE Quality Growth accounts managed by Jensen (including the Fund) are non-diversified, meaning they may concentrate their assets in fewer individual holdings than a diversified product, and therefore are more exposed to individual stock volatility than a diversified product.

EPS Growth is not a measure or forecast of an account’s (including the Fund’s) future performance.

Mutual fund investing involves risk; loss of principal is possible. The high ROE Quality Growth accounts managed by Jensen (including the Fund) are non-diversified, meaning they may concentrate their assets in fewer individual holdings than a diversified product, and therefore are more exposed to individual stock volatility than a diversified product.

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